Some sectors holding promise

Last week proved to be one of the most volatile weeks for the equity market with the index swinging in a wide range. Though much of it was largely due to the slowdown in the flow of foreign institutional investor (FII) funds, the changing preference of traders for mid-cap and small caps when compared with the large-cap has also pushed down the Sensex.

In fact, on a day when the index lost over 600 points in Wednesday's trading, a number of mid-cap stocks managed to post smart gains. As a result, the time has also come for investors to realign their portfolio. Here are some of the sectors that are worth looking at:

Banking and financial services

The sector has turned a favourite in the last couple of sessions with many of the banking and broking companies scaling new peaks. Besides the stability in interest rates, the growth story of the economy is likely to enable the sector to come out with a good show in the next couple of quarters.

While some stocks were in the limelight due to the Government's proposal to pump in fresh funds, the increased focus of FIIs on companies benefiting from domestic opportunities is likely to keep the momentum in this sector. The fair valuation of some of the domestic public sector banks makes the sector attractive.

However, the same can't be said of brokerage houses whose PE (price-earning) valuations have hit the roof. The increasing visibility in the volume growth story coupled with buoyant market conditions, has improved the interest in the stocks of financial services. However, investors will have to take a slightly long-term view while investing in these counters though some of them have moved up due to liquidity support.

Auto

The sector has fallen out of favour in the last couple of quarters but the benign interest rate regime and the recovery in the buying sentiment is likely to change the fortunes of the sector in the coming days. While the passenger car makers have managed good volume growth, signs of recovery are visible even in the two-wheeler segment which is price and interest rate sensitive. One can look at companies from this sector with a medium-term view and fresh investments can be considered in stocks of leaders of the pack.

Capital goods

The recent rally has been dominated by companies in the capital goods space and hence valuations in the case of some stocks have reached a new high. However, the buying interest has been largely driven by the volume story in these stocks. Even FII money has been chasing stocks from this sector.

While valuations look expensive in the case of large-cap stocks, investors can look at some of the fundamentally-strong engineering companies for their portfolio during market dips. The sector is likely to account for a good chunk of the bull run in the short to medium term and investors can look at fresh investments in these sectors.

Interestingly, this is one sector which provides plenty of picks even in the mid-cap space. What could boost the returns from these stocks is the fact that a number of companies also act as vendors to a number of sectors ranging from engineering to construction.

With infrastructure as a sector getting the much-needed attention and investments, capital goods seems to be one of the safe sectors for investors with a medium-term outlook.